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Topic: Feb 2018 market sell off (Read 1271 times)

1. "Normal" correction after 8-9 years of market growth.2. Inflationary concerns growing - tax rate cut spurred increasing wages which increases inflation (volume of money flowing through economy) concerns. Controlling inflation is one of the "mandates" of central banks (the Fed). When inflation measures increase, then they raise interest rates. Interest rates make investing in debt more attractive than equities. It also increases the cost of doing business (i.e. decreases cash flows/profits).3. ETF/ETNs (exchange traded funds/notes) like XIV. What's XIV? It's an ETF that follows the VIX. What's the VIX? It's a measurement of market volatility. How can an investment be profitable on volatility? They invest in options/futures/bets on the movement of the market. They don't create anything (like a company or individual would). Instead, they derive their value from something else. In this case, the ETN's value is a derivative of market volatility. But the investment manager had to keep doubling down on their investment... Until it got too expensive to maintain and the model broke (and they terminated the XIV). The crux of this theory is that it materially impacted the market (or at least the market models used by passively traded asset managers/mutual fund managers). But it would also show that we're not in a much better place than 2008 regarding derivatives (like MBS/CDO's and ETN's).

The tax cut and increased government spending on infrastructure et. al. would traditionally fuel increased inflation: both actions put more money into the market and more money often leads to increased prices. It would not be unusual for the fed to want to get some of that money out of the market to keep inflation under control. In the past they’ve done this by increasing the interest rate on treasuries as an incentive to get us to loan them the money we’d otherwise be buying stocks or “stuff” with. Getting the money out of circulation is supposed to reduce the threat of inflation.

Whether or not that always works the way it’s supposed to is debatable, at least in the short term of a year or two, but eventually it does seem to work. And those treasuries can become a competitive alternative to stocks when rates go up. If I could get a guaranteed 8% on a 30-year Treasury or a “hoped for” 11% in stocks over the same period, I’d give the treasuries a hard look. Especially as I am getting older and don’t have as much time to make up short term losses in the market. A lot of Americans are getting older... if rates go up just a few percent from here, I could see a lot of stock money come off the table and into bonds.

I tend to be more active with the VXX. But that's a "trader" thing, not an investment strategy. Sure I use volatility indexes to offset risk in my trading portfolio but the retirement stuff I tend to be a little more value oriented.

As of 12/17 My IRA has been 100% cash. I'd love to point to some data or metric but in truth it's better to be lucky than good. But the markets were up something like 30% on the year. It was time to take the win and head to the sideline. Got an earbeating from the Mrs. about "our money not doing anything". Now I'm once again a genius.

A lot of this stuff (for me) is about learning. I don't mind losing a little money here and there if I gain from the experience.